Two main types of life insurance exist: whole life insurance and term life insurance. Term life insurance provides coverage for a specified number of years. This type of insurance plan does not develop a cash value. The whole life insurance definition on the other hand, provides an individual with coverage for either their whole life or until they reach the age of 100. Whole life insurance plans develop a guaranteed cash value.

This usually begins following the first year of the plan. With whole life plans, you are required to pay a fixed insurance premium for the rest of your life and are not required to meet the costs of the increasing insurance premiums as found on term life policies. In order to remain in possession of the insurance, it is vital to keep up with full premium payments.

The obvious advantages of whole life insurance are the fixed premiums and the guaranteed cash values.  Aside from insurance protection for life, whole life insurance also features an investment element in which you can accumulate cash value on a tax-deferred basis. The individual named on the policy can cancel or surrender the insurance policy whenever they wish and they will receive the cash value.

Some types of whole life insurance plans generate cash values that are larger than the guaranteed amount. However, this is dependent upon the interest rates and market performance. Furthermore, you hold the right to have a loan of your whole life insurance policy’s cash value. One of the advantages of whole life insurance is the opportunity to be able to earn dividends. Furthermore, the interest accrued on a whole life insurance policy is adjusted on an annual basis.

Like many insurance products, there are many different whole life insurance policy options. It is important to budget for whole life insurance premiums in the long term and refrain from purchasing whole life insurance if you will be unable to afford it.

Some people have a resistance to becoming informed about life insurance because it seems like a tedious subject with a morbid tinge to it. The thing is that if you decide to learn enough about it to make a well-informed decision as to what’s the best for you and your family, we are talking a commitment of hours, not weeks or months. The key is to start with a broad overview of life insurance, and then to drill down to a whole life insurance explanation that will be easy to understand. You just need a good quality guide to life insurance, like the one you’re reading right now.

So the big picture. There are two kinds of life insurance: term life and permanent life. Term life can really be summed up in a sentence. For a given period, the insured person (the policyholder) pays a monthly premium to the insurance company in return for an assurance that his/her loved ones (or beneficiaries) will receive a payout of an amount specified in the policy, in the event of the death of the insured person, during the term of the policy. If the policyholder is alive when the term of the policy is over, there is no payment at all, and since amortization stats tell that this is what usually happens to term life holders, they are cheaper than the other main kind of insurance, ‘permanent insurance’, which covers you for your whole life.

The simplest kind of permanent insurance is actually called Whole Life Insurance. There are advantages of whole life insurance over term life, but as you’d guess, if it covers you for your entire life it must be more expensive. Still, some people people find it attractive because it offers the assurance that one’s life won’t be uninsured when their term life policy is finished.

But let’s look closer. A whole life insurance policy has a so-called ‘cash value’ associated with it, which is an amount that the policy builds up in value over the years, such that it will eventually be equal to the death benefit. In addition to the higher premiums you pay, the policy is also set up so that you will earn interest on the cash value. Another advantage is that you normally are allowed to borrow money against your policy’s cash value. The reality though, is that the peace of mind that you have knowing that you have coverage for your entire life, may not be worth the higher premiums.

Whole life insurance rates are higher than term rates–often the premiums you will pay are multiples of similar term coverage. What if, instead of paying the insurance company all that extra money each month as a form of ‘forced savings’, you chose conservative, diversified, very long-term investments? Miscellaneous fees with whole life insurance are often so high as to make them unattractive as investments, for most people, regardless of what an agent will tell you. Managing your money well and adding to your investment accounts in a disciplined fashion, over decades, will probably leave you with holdings that far exceed the death benefit you are diligently paying toward with your whole life policy.

There are other kinds of permanent life insurance, like variable life insurance and universal life insurance, which function better as investments, but do require some financial knowledge and even some risk. There are explained elsewhere on this site. Hopefully though, that was a whole life insurance explanation that didn’t put you to sleep, and at least gave you a basis for further exploration as to what form of coverage will work best for you.

One of the reasons life insurance as a subject seems confusing is because the terminology used when talking about it is fairly incomprehensible to a layman. It’s unfortunate, because basic life insurance concepts really aren’t that difficult to understand. I’ll start with some definitions in the article and I guarantee that 500 words from now you will ‘get’ the basics, and have whole life insurance explained to you. That’s right, a guarantee. And we hardly know each other. Anyway, after that you can determine if whole life insurance policies are something that you want to examine more closely.

First we need to look at whole life in the context of other forms of insurance available to you. Now, the most basic insurance, term life, is simply coverage for a specific period, for which a policyholder pays a monthly premium. If the insured person outlives the policy, nothing is paid out. If he dies, there is a payout. Because people most do outlive their term policies, they are relatively inexpensive.

Inexpensive relative to what? Glad you asked. Relative to so-called permanent life insurance. There are many sub-types of permanent life insurance, but as the name indicates, they are all ‘permanent’ insurance policies that are designed to have a payout, or ‘death benefit’ (you’ve never used those two words together before, have you?), no matter how far in the future the policy holder dies. So, no fixed term. Will pay out. You can see why permanent insurance is more expensive than term.

So what is whole life insurance, and what does it have to do with all this? Whole life is the simplest form of permanent life, and it can be seen as a middle ground between straightforward term life, and other forms of permanent insurance, like variable life insurance or universal life insurance, which involve more flexibility, but often demand greater financial sophistication and involve increased financial risks as well. Whole life insurance rates will be higher than those for term, but at least they are constant over the duration of the policy.

With whole life (and all permanent insurance actually), the concept of ‘cash value’ was introduced, where the policy over time would build up a reserve amount that would eventually cover the death benefit. So maintaining that cash value is the reason for the higher premiums you will pay with whole life. The good news is that (unlike term life) you are actually paid interest on the cash value, so that the premiums you have paid over are actually working for you. Also, you usually can borrow against the cash value your policy has built up.

I won’t cover the more complicated forms of permanent life insurance in this article, but suffice it to say that it is possible to buy policies that allow much more flexibility in what you can do with the cash value, that have variable premium payments, and that actually have some risk associated with them. But you at least have a handle on whole life insurance now, I hope.

Whole life insurance on the other hand is a life insurance policy that a person takes advantage of by paying premiums during his lifetime. If at the end of the maturity of the policy and the person who took the insurance is still alive, that person is entitled to his benefits, if however he or she did not survive, the money will be given to his or her beneficiaries. This is like an investment with very little risk there is no chance for ‘losses’ as there might be with other investments. You can be sure that no matter what happens, you will get the value of what you paid for during your lifetime. If you want security for your family, then taking a whole life insurance is a good idea.   Click here for a whole life insurance definition.